9805405R
STAR SUPERSEDED WITHOUT SUMMARY
Accession No.(s): 9805405R
Document superseded on: 08/15/2013
STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
FRANCHISE TAX
Section 3.562. Limited Liability Companies. (Tax Code, sec. 171.001 et.
seq.).
(a) Effective date. The provisions of this section apply to franchise tax
reports originally due on or after August 26, 1991.
(b) Definitions. The following words and terms, when used in this section,
shall have the following meanings, unless the context clearly indicates
otherwise.
(1) Limited liability company-A company organized and existing under the
provisions of the Texas Limited Liability Company Act or a foreign limited
liability company described in the Act, Article 1.02 A(9).
(2) Internal Revenue Code-
(A) For reports originally due on or after January 1,1998, the Internal Revenue
Code (IRC) of 1986 in effect for the tax year beginning on or after January 1,
1996, and before January 1, 1997.
(B) For reports originally due on or after January 1, 1996, and before January
1, 1998, the Internal Revenue Code of 1986 in effect for the tax year
beginning on or after January 1, 1994, and before January 1, 1995.
(C) For reports originally due on or after January 1, 1992, and before January
1, 1996, the Internal Revenue Code of 1986 in effect for the tax year beginning
on or after January 1, 1990, and before January 1, 1991 (1990 IRC).
(D) The franchise tax law requires that the 1990 IRC be used for reports
originally due prior to January 1, 1996. Because of this requirement, there
may be differences between federal taxable income reported for federal income
tax purposes and reportable federal taxable income for franchise tax purposes
for franchise tax reports originally due prior to 1996. To the extent that
such differences exist, the 1990 IRC must be used to report the differences for
reports originally due on or after January 1, 1996. For example, if a
corporation was denied any portion of an IRC sec. 179 deduction on an asset in
computing taxable earned surplus on a franchise tax report due prior to January
1, 1996 (because the sec. 179 deduction exceeded the $10,000 limit allowed
under the 1990 IRC), the corporation will be allowed to compute depreciation on
the asset based on the 1990 IRC (i.e., the corporation may depreciate the asset
based on the $10,000 sec. 179 deduction allowed under the 1990 IRC) for reports
originally due on or after January 1, 1996.
(3) C corporation-A corporation defined in Internal Revenue Code, sec.
1361(a)(2).
(4) Tax reporting period-For the purposes of this section, the period upon
which the tax is based under the Tax Code, sec. 171.1532 or sec. 171.0011.
(c) Taxable capital. To determine the taxable capital of a limited liability
company, add the company's members' contributions, as provided for under the
Texas Limited Liability Company Act, and surplus.
(1) The Texas Limited Liability Company Act, Article 5.01A, provides that the
contribution of a member may be in cash, property or services rendered, or a
promissory note or other obligation to pay cash or transfer property to the
limited liability company.
(2) A member's contribution is the sum of the cash contributed and the agreed
value of any other contribution made plus the amount of cash and the agreed
value of any other contribution which the member has agreed to make in the
future as an additional contribution, provided that the promise by a member to
make a contribution to, or otherwise pay cash or transfer property to, the
limited liability company is set out in writing and signed by the member.
(d) Earned surplus. Where and to the extent a limited liability company
allocates income and deductions to its members for federal income tax, such
items will be treated as income and deductions in determining earned surplus of
the limited liability company as though it were taxed as a C corporation for
federal income tax purposes.
(l) Federal income tax requirements or limitations imposed on the limited
liability company apply for purposes of this section.
(2) Unless otherwise provided, federal income tax limitations or other
restrictions imposed on the members of the limited liability company with
regard to claiming losses, deductions, and other items are ignored in
determining taxable earned surplus of the limited liability company.
(e) Limited liability company treated as partnership for federal income tax
purposes. Treatment of specific items reported to limited liability company
members in computing reportable federal taxable income for earned surplus
purposes.
(1) Ordinary income from trade or business activities is included and ordinary
losses from such activities are deducted.
(2) Net income from rental activities is included and net losses are deducted.
(3) Taxable interest is included unless the interest qualifies for exclusion
under the provisions of sec. 3.555(k) of this title (relating to Earned
Surplus: Computation). Interest income which is exempt from federal income tax
is excluded and expenses related to such income are not deductible in computing
reportable federal taxable income.
(4) Dividend income received by a limited liability company is included except
for:
(A) amounts reportable under the Internal Revenue Code, sec. 78 or secs.
951-964;
(B) dividends from a subsidiary, associate, or affiliate that does not transact
a substantial portion of its business in the United States. If 80% or more of
a corporate payor's gross receipts (as computed for earned surplus) are
attributable to business outside the United States, the corporate payor is not
doing a substantial portion of its business within the United States. The
payor's gross receipts are measured based on the period upon which the
recipient's tax is based under the Tax Code, sec. 171.0011 or sec. 171.1532;
(C) dividends from a subsidiary, associate, or affiliate that does not maintain
a substantial portion of its assets in the United States. If 80% or more of a
corporate payor's tangible assets (based on original cost) are situated outside
the United States, the corporate payor does not maintain a substantial portion
of its assets within the United States. The payor's assets are valued at the
end of the tax reporting period upon which the recipient's tax is based under
the Tax Code, sec. 171.0011 or sec. 171.1532; and
(D) dividends which qualify for exclusion under the provisions of sec. 3.555(k)
of this title (relating to Earned Surplus: Computation).
(5) Royalty income is included.
(6) Payments made to members which qualify as guaranteed payments under
Internal Revenue Code, sec. 707(c), and which constitute ordinary and necessary
business expenses under Internal Revenue Code, sec. 162, but are not subject to
Internal Revenue Code, sec. 263, are deductible.
(7) Salaries and wages used in computing ordinary income or loss are allowed in
computing reportable federal taxable income after deduction for any jobs credit
claimed on the limited liability company federal income tax return. Other
expenses which are reduced for credits claimed on the federal income tax return
similarly are allowed net of such credits.
(8) Deductions for charitable contributions are allowed.
(9) Capital losses in excess of capital gains are deductible.
(10) If deductions for oil and gas depletion or intangible drilling costs are
allowable to members of a limited liability company rather than to the entity
itself, the limited liability company must compute such deductions as though
the entity were taxed as a C corporation for federal income tax purposes.
(11) The limited liability company is allowed to deduct Internal Revenue Code,
sec. 179, amounts reported to members, subject to limitations imposed on the
limited liability company as if it were taxed as a C corporation.
(12) A limited liability company may deduct foreign income taxes reported to
members unless the taxes are otherwise deducted in computing taxable items
reported to members.
(13) No deduction is allowed for amounts reported to members which are personal
expenses even though such items may qualify as itemized deductions on the
member's income tax return.
(f) Limited liability company treated as sole proprietorship for federal income
tax purposes.
(1) The reportable federal taxable income of the limited liability company will
be the taxable income and deductions reported on the sole proprietor's
individual income tax return, including any schedules and attachments to the
sole proprietor's income tax return that relates to the limited liability
company.
(2) The limited liability company may not deduct any amounts for compensation
of the member who is treated as the sole proprietor for federal income tax
purposes.
(g) Single member limited liability company which is treated as a division or
branch of a corporation for federal income tax purposes. The reportable
federal taxable income of the limited liability company will be computed as
though the limited liability company were a separate corporation for federal
income tax purposes. Therefore, the reportable federal taxable income will be
computed under the provisions of Texas Tax Code sec. 171.110(d).
(h) Limited liability company treated as corporation for federal income tax
purposes. The reportable federal taxable income of the limited liability
company will be computed under the provisions of Texas Tax Code sec. 171.110(d)
as if the limited liability company were a corporation.
(i) Officer and director compensation. See sec. 3.558 of this title (relating
to Earned Surplus: Officer and Director Compensation) regarding compensation
used in computing earned surplus of a limited liability company.
(j) Corporate members of limited liability companies.
(1) Taxable capital.
(A) A corporate member of a limited liability company must use the cost method
of accounting for its investment in the limited liability company.
(B) Cost is the original valuation of the investment under Generally Accepted
Accounting Principles. There will be no adjustment for the member's
distributive share of the limited liability company's items of income or loss
as reported annually by the limited liability company. The cost of an investee
(limited liability company) will be reduced by distributions and/or withdrawals
from the investee insofar as such distributions represent a return of capital.
(C) To the extent a distribution and/or withdrawal from the limited liability
company is made up of current or previous undistributed earnings of the limited
liability company and not a return of capital, it is included in gross receipts
for taxable capital of the receiving corporate member. These distributions
and/or withdrawals are apportioned based on the state of organization of the
payor (limited liability company).
(2) Earned surplus.
(A) For the portion of a tax reporting period during which a limited liability
company is treated for federal income tax purposes as described in subsection
(e) or (g) of this section, a corporate member's distributive share of a
limited liability company's items of income or loss is not included in the
member's earned surplus or gross receipts for earned surplus to the extent the
items would have been reported at the limited liability company level in
accordance with the requirements of subsection (e) or (g) of this section. The
amounts excluded are limited to the amounts otherwise included in taxable
earned surplus of the corporate member.
(B) Distributions and/or withdrawals from a limited liability company described
in subparagraph (A) of this paragraph are not included in earned surplus and
are not considered gross receipts for apportionment purposes of the corporate
member unless a gain is recognized by the corporate member for federal income
tax purposes. These distributions and/or withdrawals are apportioned based on
the state of organization of the payor (limited liability company).
(3) For the purposes of the subsection, a corporate member includes a
corporation as defined in the Tax Code, sec. 171.001(b)(3).
Effective Date: May 4, 1998
Filed with Secretary of State: April 14, 1998
Comptroller of Public Accounts
ACCESSION NUMBER: 9805405R
SUPERSEDED: Y
DOCUMENT TYPE: R
DATE: 05/04/1998
TAX TYPE: FRANCHISE